Your Money

Many factors can dictate what type of insurance you need

Certified financial plannerJanuary 6, 2013 

Neil Brown

An often asked question people have is: “How much life insurance do I need?” Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage and your goals.

Here are some questions that can help you start thinking about the amount of life insurance you need:

•  What immediate financial expenses, such as debt repayment and funeral expenses, would your family face upon your death?

How much of your salary is devoted to current expenses and future needs?

•  How long would your dependents need support if you were to die tomorrow?

•  How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities or an inheritance for your children?

•  What other assets or insurance policies do you have?

There are two basic types of life insurance – term and permanent, or cash value. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy’s death benefit. If you live to the end of the term, the policy simply terminates. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time.

Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in the cash value account. The cash value continues to grow, tax deferred, as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die, you are canceling your coverage and will be entitled to receive the cash value, minus any loans and surrender charges.

Many different types of cash value life insurance are available, including:

•  Whole life: You generally make equal premium payments for life. The death benefit and cash value are predetermined and guaranteed, subject to the claims-paying ability of the issuing insurance company. Your only action after purchase of the policy is to pay the fixed premium.

•  Universal life: You may pay premiums at any time and in any amount, subject to certain limits. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.

•  Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in subaccounts.

•  Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount, subject to limits, and the cash value goes up or down based on the performance of investments in the subaccounts.

Before deciding whether to buy term or permanent life insurance, consider policy cost and potential savings that may be available. Also keep in mind that your insurance needs likely will change as your family, job, health and financial picture changes, so you’ll want to build some flexibility into the decision-making process.

When you purchase life insurance, you must name beneficiaries to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive.

Once you purchase a life insurance policy, make sure to periodically review your coverage because as you age, your needs will change. An insurance agent or financial professional can help you with your review.

Life is a journey, plan for it.

Neil A. Brown is a CPA and CFP with Burkett Financial Services in West Columbia. Reach him at www.uscneil.com or (803) 200-2272.

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